Bruce Helmer and Peg Webb

For most Americans, a home is often their biggest expense. Inflation has soared in most sectors of the economy, but it is hitting the housing market particularly hard. Should you rent or buy in this hot real estate market?

INFLATION IS COOLING BUT HOUSING IS STILL HOT

While almost everyone has been focused on the skyrocketing price of gas and groceries these days, housing costs accounted for 40% of the rise in the consumer price index. (CPI) base, according to the Bureau of Labor Statistics. Rents have risen dramatically across the country, but home sales prices have risen even more. According to CoreLogic, a property data provider, year-over-year home prices rose 18.3% in June. Rent changes tend to lag house price increases, so we can expect rental rates to continue to rise for some time.

If you’re a potential first-time home buyer, you might be wondering if it makes sense to wait out this period of high prices.

In an effort to stifle inflation, the Federal Reserve has aggressively raised interest rates four times so far this year. Since mortgages are indirectly linked to these rates, the cost of mortgages has recently increased to over 6%, before falling back towards the middle of the 5% range. This had a slight cooling effect on house prices, but also did not encourage homeowners to put their properties up for sale. Only 17% of Americans think now is a good time to buy a home right now, according to a July poll by Fannie Mae.

Keep in mind that lower inflation does not mean lower prices, it just means a slower rate of price growth. If you can’t make the numbers work for your situation, it’s probably okay to wait, instead of locking in to today’s higher prices and interest rates. If you decide to rent instead of buy in today’s market, you won’t increase your home’s equity, but you could put yourself in a better position to qualify for a lower-cost mortgage in the future. For one, you have more time to come up with a larger down payment. Plus, if you have less than stellar credit (which affects the interest rates banks will offer you), you have a lead on how to fix your rating. Finally, by postponing a purchase, you can have more income which can improve your position as a borrower.

MAIN FINANCIAL REASONS FOR RENT

There are many ways to justify the decision to rent rather than buy.

You are unsure of your job or location: If you just moved to a city, plan to change jobs soon, or don’t plan to stay in the community, it may make more sense to rent.

You don’t have enough savings for a down payment. You generally want at least 20% of the purchase price to be saved for a down payment, to avoid private mortgage insurance.

You don’t want the hassle of maintaining a home. Owning a home is a major investment and a serious responsibility. All kidding aside, in a tight labor market with supply chain issues, the cost of repairs is skyrocketing. Plus, you have to pay taxes, utilities, and insurance, which can eat up a significant percentage of your fixed expenses each month.

THE TOP THREE FINANCIAL REASONS TO BUY

There are just as many good reasons to decide to buy rather than rent, depending on your financial and personal situation.

You believe in the power of your home equity. Although there are significant costs associated with home ownership, the equity you accumulate in your home can become an important part of your personal net worth. As an investment, of course, real estate is a long-term game that can go up and down in value. Still, you have to live somewhere, and living in your own home is a great way to force yourself to save.

The cost of a mortgage is what you pay in rent. Unless there are more compelling reasons for you to rent, paying the same amount to create value in your home rather than paying a landlord is, for most people, a no-brainer.

You plan to stay put. If you want to improve your chances of selling at or above what you paid for the house, be sure to stay in the house for a while (3-5+ years).

THE DECISION IS DEEPLY PERSONAL

Whether you decide to rent or buy is a personal decision that should be informed by your financial situation, your lifestyle, your professional situation and your long-term goals. If you need additional perspective before making that big investment decision, we always encourage you to speak to a financial adviser, mortgage lender or real estate agent for professional advice.

The opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations to any individual.

Bruce Helmer and Peg Webb are financial advisors at Wealth Enhancement Group and co-hosts of “Your Money” on KLKS 100.1 FM on Sunday mornings. Email Bruce and Peg at [email protected] Securities offered by LPL Financial, member FINRA/SIPC. Advisory services offered by Wealth Enhancement Advisory Services, LLC, a registered investment adviser. Wealth Enhancement Group and Wealth Enhancement Advisory Services are separate entities from LPL Financial.